Blog

23.06.2017

Have start-ups been changing traditional business models?

I was asked this question at the recent Polish Chemistry Congress, during a debate on the role of start-ups. My answer was affirmative. After all, start-ups are created and developed to venture into and make money in unexplored niches. If a start-up is growing strongly, this means its profit earning formula is better than a traditional one. Therefore, as innovations spread, traditional business models are replaced with novel ones, with Airbnb and Uber being classic examples as two start-ups that have changed the business models of the traditional hospitality sector and taxi companies.

On the other hand, Uber’s history, and Airbnb’s too to some extent, shows that traditional companies can put up a fierce fight to defend their territory. They put forth a strong argument that new business models, offering similar services at lower prices, operate outside the law to reduce costs. As a result, several countries have banned Uber and/or tightly restricted Airbnb services. Both companies have survived, though, thanks to proper scaling of their businesses on the U.S. market. Regulators there know that start-ups must have a couple of extra cushions and turn a blind eye (for a while) to those in the regulatory grey area as long as this serves consumers’ interests. Next, when it becomes clear that a new business model is actually working, they try to find a way to regulate it without killing it. To find out more, read an interview with Kevin Werbach of Wharton. The existing rigid regulations, designed to accommodate traditional business models, can considerably constrain the development of new ones and of resulting innovations. This is not a recipe for growth, especially in an era of rapid change.

Innovation is a business category. Even the best invention will remain merely that, unless it is successfully marketed and sold to a large number of consumers. Innovations generate demand, offering new and better solutions at attractive prices. It is, however, only natural that novelties hardly ever capture the market in a flash. Initially, they can be taken up by a small circle of enthusiasts, in whom the excitement of discovering new possibilities is stronger than fear of buying something that has not yet been tested. Zealous as they may be, they do not, however, suffice for a start-up to succeed in the marketplace. There is general consensus about this among practitioners. To keep sailing smoothly ahead, an innovative business must be equipped with two robust propellers. The first one is its offering (of goods, services, technologies, etc.), while the second one is a plan of how to attract the mass market and thus to make profit, that is its business model.

Business models are variously defined, depending on what purposes they serve. In the case of companies with a successful track record on the market, they are usually synonymous with those track records. On the other end of the spectrum are businesses which failed, providing examples of bad business models. There is a good reason why Michael Lewis in his book ‘The New, New Thing’ applies artistic categories to business models. Many people have a sense that they can tell a work of art when they see one (especially if it is either outstanding or horrible), but few can define it.

I personally like the approach to business models proposed by Peter Drucker. He underscores the role of assumptions about the market made when thinking about future gains. An effective business model provides clear answers to the ever valid questions: Who are our target customers? What do they value? What specifically will we earn money from? What is the economic logic behind our business, or, in other words, how will we deliver value for money? Drucker also draws attention to the fact that to be successful, a business model must be dynamic as “… sooner or later, some assumption you have about what’s critical to your company will turn out to be no longer true.” History has seen many smart companies, like IBM or Kodak, which did not manage to adapt to a changing market environment only because they failed to make clear assumptions regarding change.

Drucker’s warning is also true at a macroeconomic level. The world is constantly in flux, and so are technologies, which affect societies. Good regulations defining an economy’s ‘business model’ should keep abreast of such changes. But what are those changes and what do they entail? Kevin Werbach, the aforementioned author of the Internet of the World concept, describes them as follows: “There’s something big going on, and it’s a bigger trend than most people realize. There are three trends, and each in and of themselves is significant. One is what we often call the sharing economy – it’s really more the on-demand economy. It’s not just about sharing resources, but services like you mentioned, Uber and Airbnb, which give on-demand access to resources. The second piece is the Internet of Things — all kinds of devices, billions of devices getting networked. And the third is big data and analytics — the ability to understand and manipulate trends coming out of all those devices. What those three things together mean is that all of the world, potentially, is networked. It’s not just that you go somewhere to a computer or you go to your phone to get access to information. It’s that potentially everything is a generator of data, and all that data can be integrated and analysed and processed and manipulated. What that means is the kinds of trends and the kinds of developments that we saw online are now happening offline. They’re happening to things and physical objects in the world, as well.”

The conclusions for business are strong and instructive: Your environment is changing – you must keep up or else stop making money. You can surf on mega-trend waves – aligning your business model. Whether a transition platform is successful depends on your ability to predict the direction in which future changes will be trending. All businesses evolve – we do not know exactly when and how a transformation will come about. Companies focused on optimising long-established methods and models, instead of thinking about the future, put their shareholders, employees and customers at a greater risk. Therefore, it is worthwhile to try out a number of potential transition models if you want your business to be able to seize opportunities as they present themselves. You will never make it to the top if you let someone else blaze the trail for you.